Novel ETFs Heat up Market

NEW YORK -- One of the hottest investment markets is getting ready to add even more sizzle, as new and unique exchange-traded funds (ETFs), some currently in SEC registration and still under regulatory scrutiny, are expected to roll out shortly.

That was the buzz at an ETF summit media conference held here last week, sponsored by Barclay's Global Investors of San Francisco. Barclay's is the leader of the ETF pack as the sponsor of 97 ETFs branded under the iShares name with more than $100 billion in ETF assets globally. In fact, Barclay's has the biggest market share of the exchange-traded fund market (48.8%), followed by State Street Global Advisors of Boston (33.3%) and Bank of New York (15%).

Anticipated new ETF entrants include two gold exchange-traded funds, one sponsored by Barclay's and based upon the Comex Gold Index, and one based upon gold bullion that is being co-created by the World Gold Council and State Street under the StreetTRACKS label. Also on tap for launch is a socially responsible indexed ETF from Barclay's and three new ETF VIPERS sponsored by Vanguard Group of Malvern, Pa., that will cover various international markets. In addition, PowerShares Capital Management of Wheaton, Ill., is planning a slate of 26 ETFs.

Unique Niche

The ETF market, in general, has been steadily growing, with both sponsors launching new and, often, novel products, and more financial advisers and long-term investors targeting ETFs on their investment radar, conference speakers said.

But as the exchange-traded fund market becomes increasingly competitive, those ETFs that can occupy a unique investment niche are getting the most attention and snaring the most dollars right now.

"Having products that are more unique and more targeted [to a niche] allows them to grow faster," said John Thain, chief executive officer of the New York Stock Exchange, which lists 60 ETFs including two proprietary ETFs based upon NYSE-traded companies. The NYSE has thrown its weight behind partnering with others and developing more of its own proprietary ETFs. "I think ETFs are an attractive product and an attractive growth opportunity for us," he added.

According to Paul Mazzilli, director of ETF research at Morgan Stanley of New York, two of the hottest ETFs to come out so far this year have been the iShares Dow Jones Select Dividend and iShares Lehman TIPS. The former appeals to investors' interest in dividend-paying stocks, while the latter addresses their concerns over inflation and rising interest rates, Mazzilli said. The iShares Dow Jones Select Dividend ETF has attracted $2.7 billion in assets, while the iShares Lehman TIPS has drawn $1 billion.

Also new and unique, and showing an uptick in trading volume, is the iShares FTSE/Xinhua Hong Kong China 25 Index Fund, which invests in mainland China, Thain said.

The sole losing ETF so far this year, based upon net cash flows, has been the Nasdaq-100 Index Tracking ETF, nicknamed "Cubes" because of its QQQ trading symbol. The ETF has seen $4.5 billion in net outflows through Sept. 30, Mazzilli said.

Of course, that's not to say that there isn't a niche and need for ETFs that cover a narrow market segment and may never become behemoths, said Lee Kranefuss, chief executive officer of Barclay's intermediary and ETF business. "Some funds are just there to fulfill a need for investors but will never be huge," Kranefuss said.

As far as what ingredients make for a successful ETF, Mazzilli said it's a mix of "a good index, a good index manager and very good marketing support on the ground," with other executives giving examples of the types of innovative indexes that ETF product developers might bring to the market in the future. Down the road, for example, it's likely that there will be some type of ETF pegged to currencies, said Ted Theodore, president and chief investment officer of New York money manager OAM Avatar. He also predicted that there could be ETFs based on inverse indexes such as those created by Rydex Investments of Rockville, Md., and ProFunds of Bethesda, Md.

Another way for ETF sponsors to garner attention is offer ETF products based upon so-called enhanced indexes, such as those that both Rydex and PowerShares offer, said Dan Coulton, a fund analyst with Morningstar of Chicago.

Buy and Hold

Right now, while there isn't a great deal of quantitative data to prove that the fund scandal has driven investors out of funds and into ETFs, there has been a great deal of demand for coverage and information on ETFs, Coulton added. "There is still a lot of market share for ETFs to take from the almost $8 trillion mutual funds," he noted.

While growth has come from new ETFs being launched, the big growth story is that more and more investors are buying and holding ETFs, Mazzilli said.